Andrew Ness – Manager Update

Looking forward, we still have confidence in both the asset class and in TEMIT’s portfolio and that’s because of the attractive characteristics of the companies we own.

We seek sound business models, with solid balance sheets. We want to participate in the growth opportunity in the asset class but critically, not at any price.  That means we continue to own high quality, resilient, growth-oriented businesses, at attractive valuations.  In addition, a significant number of our companies are offering attractive dividend yields and many are buying back shares. This provides additional support to the portfolio.

TEMIT’s portfolio also continues to reflect a high level of diversity of names by industry, where in our top 10 holdings we have 7 industries represented – ranging from semiconductors, banks and retailing to materials, insurance and media and entertainment.

We also have a good mix of well-known large-cap names, ICICI Bank – one of the largest private sector banks in India, TSMC – the world’s leading semiconductor foundry and some lesser-known names too - for example LG Corp - a Korean conglomerate with world class assets in consumer electronics, electric vehicle batteries and speciality chemicals.

And we own names like Guangzhou Tinci – the world leader in electrolyte production – one of the 4 key critical components for electric vehicle batteries – alongside the separator, anode and cathode.

These companies are typically leaders in their respective industries, with resilient business models, robust balance sheets and solid profitability, and that gives them an ability to navigate the challenging environment out there.  We also take comfort from the fact that Emerging Market valuations are low and investors are lightly positioned.

As Sir John Templeton said: “Bull markets are born on pessimism, grow on skepticism, mature on optimism and die on euphoria”. After a decade of Emerging market underperformance, it’s fair to say there are plenty of pessimists and skeptics out there.

We’re hoping 2023 challenges that view.

As we head further into 2023, we find many reasons to be constructive about emerging markets.  China’s sudden re-opening and an easing of global inflationary pressures are clear positives. Markets such as Chile and Indonesia have already started to pause or scale back the magnitude of their interest rate hikes.

We expect a policy pivot to revive consumption and spur economic growth as inflation slows.  In addition, after a slowdown in earnings in 2022, for many markets there is a prospect for a recovery in earnings this year, although much of that may be seen in the second half of the year. Nonetheless, a pickup in earnings revisions in emerging markets would signify better times ahead for equity valuations.

Lower inflation, however, can also be associated with a weakening global outlook, and the inversion of the US yield curve indicates a possible recession on the horizon.

Economies with a greater focus on domestic demand therefore are better placed to weather a more challenging environment.  These markets include countries such as India, Brazil and Indonesia with India also attracting corporate investors looking to diversify their manufacturing base away from China.

Similarly, the Middle East is experiencing an influx of people and capital whilst enjoying an upturn in consumption due to the positive spill-over effects from high energy prices.

As the investment environment evolves, an important feature that we seek in Emerging Markets is resilience, in terms of both economies and companies.  A particular area of focus for us is the sustainability of corporate earnings, whether in the face of COVID-19, policy changes, technology disruption or other challenges.

We see companies with structural growth drivers aligned with digitalisation, decarbonisation and premiumisation emerging as long-term winners.  It’s clearly been a difficult period for the asset class and challenges remain but we’re confident on the quality of companies that we invest in.  These are well-managed businesses with robust balance sheets and operate in secular growth areas whilst trading at attractive valuations.

These characteristics should therefore drive the long-term performance of the Trust.